Expanding Canada Pension Plan Retirement Benefits: Assessing Big CPP Proposals

Abstract

Current and growing deficiencies in many workers’ ability to maintain their accustomed living standards in retirement have evoked varied proposals for reform of Canada’s retirement income system. This study focuses on proposals for expanding the retirement benefits of the Canada Pension Plan (CPP), and undertakes comparative analysis with proposals for reforms affecting workplace pensions and individual savings. It begins by reviewing key policy questions for the retirement income system and describing essential features of several proposals for CPP benefit expansion. It then uses these “Big CPP” proposals as a basis to assess the design issues for expanding CPP benefits and the implications for other components of the retirement income system. The paper assesses each of the major private and public savings vehicles based on multifaceted criteria for a well-performing retirement income system; a mandatory public scheme with defined benefits ranks most highly on almost all criteria other than individual flexibility. Additional behavioural and institutional factors also support the use of mandatory public pensions: myopia in savings, individual investment behaviour, scale economies and costs of fund management, adverse selection and annuitization costs, the Samaritan’s Dilemma, and labour market incentives. The study provides an overview analysis of key design issues for the expansion of CPP retirement benefits. Major issues include the desirable scale of expansion for both the percentage of insurable earnings and the insurable earnings ceiling; mandatory versus voluntary coverage and options; the allocation of investment return risk; and the phasing-in of higher premiums and benefits. The study then assesses the implications of CPP expansion for other components of the retirement income system: Old Age Security and the Guaranteed Income Supplement, workplace pensions, tax provisions for savings, and individual savings. A Big CPP fits well within the overall retirement income system, with other components adapting to the increased CPP benefits over a long phase-in period. Alternative reform proposals relating to the regulation of workplace pensions and new voluntary supplemental or multi-employer pension schemes are potentially useful but no substitute for the expansion of CPP benefits. Mandating employers to offer adequate pensions could be an alternative to a Big CPP but without all the same advantages. In summary, diverse empirical and analytical considerations support the expansion of CPP retirement benefits as the centrepiece of pension reform to achieve benefit adequacy for all retirees.